Insurance Contract Drafting Error Favors…the Insurer? (NJ)
July 29, 2016
The baseline rule for courts when interpreting insurance contracts is to apply the plain meaning of unambiguous terms in an insurance policy. However, what happens when the terms are unambiguous, they favor the party seeking coverage, and a claim is presented that falls within coverage? The usual answer is that coverage will be triggered for the party. Yet, in an unusual case out of federal court in New Jersey (<em><a href="http://blog.wcmlaw.com/wp-content/uploads/2016/07/Indian-Harbor-Insurance-Company-v-NL-Environmental-Management-Services-Inc.pdf">Indian Harbor Insurance Company v NL Environmental Management Services Inc</a></em>), the court permitted the insurer to reform the unambiguous terms to remove coverage for a purported insured.
Before the coverage dispute, a 440 acre piece of property located along the Raritan River in Sayreville, NJ was acquired by eminent domain from Sayreville Seaport Associates, L.P. The property site at issue had been the subject of litigation (related to both eminent domain and contamination) for over a decade. In order to avoid prolonged litigation, Seaport Associates, along with other entities, entered into a settlement agreement in which it would fund the costs to remediate the contamination at the site. As part of the settlement, Seaport Associates was required to obtain environmental liability insurance for the property. However, Seaport Associates only had to obtain coverage for the property, and did not have to cover liabilities relating to the pre-existing contamination in the Raritan River.
Seaport Associates obtained a policy from Indian Harbor, and the policy included an AI endorsement naming NL Industries, Inc. and NL Environmental Management Services (“NL EMS”), Inc. as additional insured. The policy also contained a specific endorsement which excluded coverage for “Raritan river sediment and tidal wetland sediment” claims, but this exclusion only applied to NL Industries, Inc. In 2009, a non-profit group sued NL EMS to require it to remediate contamination in the Raritan River. NL EMS then sought coverage under the Indian Harbor policy, claiming they were entitled to coverage under the plain terms of the policy. Indian Harbor then commenced a DJ action.
Interestingly, it was undisputed in the coverage action that the policy unambiguously provides that Indian Harbor is required to cover NL EMS for the Raritan River claim by the non-profit group. Undeterred, Indian Harbor contended that it was a “scrivener’s error” that the policy exclusion for Raritan River claims did not include NL EMS, and moved for a motion on the pleadings. After this was denied, discovery ensued and Indian Harbor requested the court reform the policy to specifically add NL EMS to the policy exclusion.
NL EMS argued, that the insurance policy is clear with respect to excluding coverage solely for NL Industries Inc., and the plain unambiguous language of the policy demonstrates there was no mistake in drafting the terms of the insurance contract. Further, NL EMS contended any scrivener’s error was due to Indian Harbor’s own negligence, and the policy should be interpreted to favor the party seeking coverage rather than the drafter.
Despite these arguments, the court viewed the evidence in favor of Indian Harbor and permitted a reformation of the insurance policy. First, the court forestalled any arguments by NL EMS regarding the interpretation of the intention of the parties in drafting the insurance contract because its status was only an additional insured, and not the entity the negotiated with Indian Harbor. Second, the court looked to the agreement between NL EMS and Seaport Associates to determine whether there was an intention to exclude NL EMS from coverage for liabilities related to the Raritan River. In concluding such an intention, the court held that a “scrivener’s error” entitled reformation of the policy to reflect the intent of Seaport Associates and Indian Harbor to exclude NL EMS from coverage.
Insurance policy reformation cases are relatively rare, and even more infrequently based solely on a scrivener’s error. It was clear from the evidence that NL EMS was not meant to be covered for the claims by the non-profit group, but it certainly took the appropriate action by seeking coverage from Indian Harbor. The decision should remind coverage counsel that disputes are not always contained within the explicit terms of the insurance policy. Rather, this case demonstrates the vital importance of the underwriters in creating the various insurance contracts. Here, the underwriter’s mistake of neglecting to add both NL entities to the exclusion caused multi-year litigation and increased remediation costs, all of which was at the expense of the insurer.
Thanks to Dan Beatty for his contribution to this post. If you have any questions about this post, please call or email Brian Gibbons at <a href="mailto:email@example.com">Brian Gibbons</a> for additional information.